Eq: Total Market
In a week that saw American COVID cases surge and claim one quarter of all the world’s 10m cases, the US health secretary said that the US may not be able to contain the virus. The US has recently seen a huge jump in cases, with only two states showing a weekly decline in cases. This has led to speculation that the virus may be completely uncontained in the country. Health secretary Alex Azar appeared to acknowledge this, and when discussing containing the virus, he said “The window is closing…”, and that the southern US was seeing the worst of the flare up.
FINSUM: All the hopes that warm weather would hurt the virus have been proven wrong—the hottest places in the country are having the worst outbreaks! How does one price the odds of another economic decline because of this surge?
Markets have been rough for the last few weeks. Investors are doubting the pace of the recovery because of a big renewed rise in cases and the possibility of new lockdowns. And according to market analysts, signs are increasingly pointing to another meltdown. If you study various volatility indexes, starting with the VIX, it is becoming clearer that another big move lower is on the horizon. The VIX and other indexes have recently shot back higher after a steady fall after the huge March volatility and their momentum indicates investors may panic sell and create another big correction.
FINSUM: We do not give much respect to technical analysis on its own, but it is useful (in our opinion) as a tool to quantify what one is seeing in the real world. Right now, this makes sense given the rising worries about new cases and lockdowns.
The long sought V-shaped recovery has been like a white elephant for investors. It has been hoped for since March when the economy started to shrink, but in the last couple months, most let go of the hope as the depth of the downturn became clear. However, given recent economic data, there are growing odds that the economy might vault out of its recession like a rocket ship. Morgan Stanley says it won’t be long until investors completely buy into that narrative. MS thinks in the next six months investors will go from “doubting to believing” in the v-shaped recovery, and that by the end of the year risk assets will be in a “mid-stage bull market mind-set”.
FINSUM: This is highly speculative, but it is a clear un-muddled position. We suspect the recovery is going to be slower than v-shaped, so our expectations are not nearly so bullish.
Markets are having a tough time right now on news of surging cases across many parts of the US. In what has become a typical cycle, optimism on the recovery is being tempered by media reports of surging COVID cases in several states. The markets seem to be unusually wounded this morning, and the reason might be comments from Coronavirus Task Force chief Anthony Fauci. Speaking about the rise in cases, he called it a “disturbing surge” and warned congress that the virus was not under control.
FINSUM: The rise in cases in Florida, Texas, California, and Arizona has been alarming, especially in the last week, so markets are starting to worry about the potential for new lockdowns.
Morgan Stanley made a bold call this week. Their research team has officially adopted what seems like a fairly risky position on the economic recovery: they are saying it will be of the much sought after v-shape. The bank has been calling for a short and sharp recession for some time, but this is the most optimistic outlook they have published. According to Morgan Stanley’s chief economist, “Recent upside surprises in the incoming growth data and policy action have increased our confidence that this will be a deep V-shaped recession”.
FINSUM: We still don’t think this is going to be a v-shaped recovery. More like a U-shape or more likely a Nike swoosh shape. The depth of firings combined with the probable corresponding slow pace of consumer spending will hold back the pace of the recovery.
Evercore put out an interesting prediction today. The bank, which has a strong research team, says that the market is likely to be “violent” in the near term. They also added a twist—that it would be “violently flat”, meaning it would have sharps up and downs on but the whole remain around the same levels. Evercore highlights the upsides and risks this way, saying “A significant COVID second wave would continue to drive asset prices lower, but with vaccine development continuing, little correlation between economic re-openings and increased case growth and hospitalization data at the national level”. That said, longer term, they are quite bullish, arguing that there will be a “sharp rebound”.
FINSUM: The news flow is going to mean that stocks are very volatile for the foreseeable future. Increased case growth one day, and then a big jump in retail sales the next.